Options are very flexible and no-obligation financial instruments used to make money from different market conditions and/or to limit trading risks and exposure. Options strategies are methods to accomplish specific options trading goals and to higher utilize different opportunities and market conditions. Unlike other financial instruments options enable traders to benefit from any market conditions even in fast downtrends and in no price changes.
You will find several different alternatives trading strategies available now and new ones are invented everyday. Some of them are widely popular and followed but some others are trading secretes of some persons or groups. You can find no strategies to make money from every market condition; actually for successful implementation, many of them require some prerequisites option trading strategy. Options trading strategies can be simple which require normal trading platforms and include a couple of contracts/traders OR may be complex which require sophisticated trading systems and involves many contracts/trades.
Depending on the nature and implementation, options trading strategies could be categorized to 3 main groups as,
1. Bullish: They’re strategies which are utilized when the underlying product price is anticipated to go up. Put simply the successful implementation requires price increase of the underlying product. Examples include short put, long call, synthetic long stock, bull spread, etc.
2. Bearish: They are utilized when the underlying product price is likely to decrease and successful implementation requires price decrease. Examples include long put, short call, bear spread, synthetic short stock, etc.
3. Non-Directional or Market Neutral: These strategies are utilized on expected price volatility of the underlying instrument and aren’t rely on price ups and downs. Success with these is achieved once the expected price fluctuation is achieved or not-achieved. Examples include straddles, strangles, butterfly, etc. Non-directional strategies can be further divided to two as bullish-on-volatility and bearish-on-volatility.
In addition to the above three main categories two other categories also exists which are event-driven and stock-combination strategies; the former expects/considers a certain event like mergers and takeovers and make an effort to make money from that and the later is complex tactics that include combinations of trades or option types.
There are not one options trading strategy that suit every trader. Actually the best choice should be determined by many factors just like the underlying product, market conditions and volatility, trader experience, use of quotes and sophisticated trading systems, brokerage service trader using, trader portfolio size and risk tolerance, long-term or short-term trading goals, and money management. Although, many of today’s trading systems are pre-loaded to aid many popular strategies it is a good idea to master the maximum amount of strategies as you can and to create them easily accessible to you. The general recommendation is that to implement simple one when you’re a beginner and switch to more technical ones as you get to know more about different alternatives, the market and its movements.